Ohio budget proposal includes tax on real estate services
News organizations, interest groups, and yes, individuals, have already spent countless hours analyzing Governor Kasich’s proposed Budget 2.0 which was released in early February, and the potential implications of a 5% sales tax on services provided to consumers. It would have been nice, had Tax Commissioner Joe Testa boned up even slightly on the real estate industry prior to his testimony before the Ohio House Finance and Appropriations Committee.
According to the Great Big List of Exempt/Non-Exempt Services, some things in the housing industry would remain untouched by the Ohio budget changes – construction, renovation, repairs and residential rent/leases. During his testimony, Commissioner Testa solely focused on one of the non-exempt real estate service items; and he (I feel) completely botched it. Granted, time was limited, but by only mentioning real estate commissions, not comprehending the way the majority of real estate transactions work, and by not taking into account all of the things that truly go into buying or selling a home, he really kind of blew off the industry’s concerns, and those of future buyers and sellers.
How real estate commissions actually work
Be they members of the National Association of Realtors® or not, it is licensed real estate brokers who collect commissions earned on the sale of real estate. To do otherwise would violate Ohio law, and when Commissioner Testa says all Realtors® would collect the sales tax, but this is not correct.
The majority of real estate listings are listed as Exclusive Right to Sell, where the sellers pay the commission; they and not the buyers would be charged the sales tax on the commission, or service rendered. Claiming that something is “not anti-competitive” because everyone will be doing so (kind of like that old line about jumping off a bridge our Mom’s used to say, right?) is about the furthest thing from the accuracy and the truth as one can get.
More services in real estate than just Realtor commissions
In many real estate transactions, as we addressed previously, there are inspections (pest, general home, well, septic, radon, & lead – and maybe meth in certain areas), appraisals, home warranties, loan broker fees, certain title fees, land surveys, attorney fees, (think deed prep) and don’t forget that 5% tax on the listing broker’s commission, all of which would probably be subject to a 5% sales tax paid by consumers. There are a great number of other things that may not be part of a “normal” deal, but are becoming increasingly more common, and when all tallied up – 5% here, 5% there, that could wind up devastating the real estate consumer.
Years before purchasing a home, one of the first things a prospective buyers does, is get a credit report and score. If they happen to buy one, they may be charged a 5% sales tax. If that buyer has credit issues, and then seeks local debt counseling, and pays for it, boom, 5% sales tax.
The same is true for a current owner who is seeking relief in the form of a loan modification or principal reduction, and may because of a program’s requirements, have to go into a debt counseling program in order to qualify, will then be forced to pay a 5% sales tax.
Tax could hit consumers 20 times during a transaction
Speaking of the owner who is struggling or severely underwater, enter the short sale, which in Ohio during the first quarter of 2012 accounted for seven percent of all real estate transactions and rising steadily since 2001. Often in addition to all the other “normal” items in these transactions, there often are multiple appraisals (therefore multiple sales tax charges), sellers often seek the advice of accountants, attorneys and even investment counseling, their services would be subject to the 5% sales tax charged to the consumer. And what of the short sale negotiator or facilitator? Whoever pays their fee will be hit with that 5% sales tax as well.
The 5% sales tax has the potential to hit two consumers at least 20 times in one real estate transaction. ONE. Is it so vital to Ohio’s economy, which is driven in part by a healthy real estate market, to further hinder the ability to buy and sell homes by tacking on additional fees to consumers? Is this honestly the way to improve home ownership in this state which has been on a steady decline over the last seven years?